Tuesday, December 18, 2007
Today's Tip: Never Pay the Minimum on your Credit Card
There is a lot of craze in today's world because of the mortgage crunch. Speculative home
investors and aggressive lending practices are driving the economy into a recession that is
forcing Congress to pass new lending laws that will alleviate some of the pressures that
low-income borrowers are experiencing. So what does this have to do with today's budget
tip? Read below to learn....
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Paying the minimum on your credit card is like paying the negative amortization rate on a
home loan. A negative amortization loan is one which allows the borrower a series of
payments (minimum, interest only, 30-year fixed, or 15-year fixed). What most lenders fail
to disclose to their borrower is that paying the minimum will actually add to your mortgage
balance. In a depreciating home market, this is disastrous, as there are a lot of borrowers
out there with upside-down loans, or in other words, they owe more on their mortgage than
what their property is worth.
Paying the minimum on your credit card will never add to the principal balance on your
credit card, but doing so will delay your ability to repay your debt in most cases up to 15
years. The average credit card has an interest rate between 12-18%, so what would this
mean for you if you had a balance of $5,000? Well, if you had a rate of 12%, it would take
you just over 10 years to repay the outstanding debt if you just made the minimum
payments. If your interest rate was 18%, that repayment schedule increases all the way up
to nearly 13 years! There are interest rates out there that exceed even 18%, so you can
only imagine what making minimum payments with these rates would do to your debt.
Even if it is just a marginal amount that you are able to set aside to pay down your credit
card, I strongly encourage you to make payments that are above the minimum. Otherwise,
you will have that debt hanging over you for quite some time. And the longer you have that
outstanding debt above your head, the more tempting a home equity loan might become,
and refinancing your house to consolidate debt is one of the worst decisions you could
make, especially given today's real estate market.
If you missed any of the tips, you can review them at left. If you have comments on this
or any tip or suggestions for a daily budget tip, email them to suggestion@myfinpro.com.
Have you downloaded the free budget yet? Our free budget spreadsheet is updated for
2008 and features a monthly account tracker and budget form!
There is a lot of craze in today's world because of the mortgage crunch. Speculative home
investors and aggressive lending practices are driving the economy into a recession that is
forcing Congress to pass new lending laws that will alleviate some of the pressures that
low-income borrowers are experiencing. So what does this have to do with today's budget
tip? Read below to learn....
\
Paying the minimum on your credit card is like paying the negative amortization rate on a
home loan. A negative amortization loan is one which allows the borrower a series of
payments (minimum, interest only, 30-year fixed, or 15-year fixed). What most lenders fail
to disclose to their borrower is that paying the minimum will actually add to your mortgage
balance. In a depreciating home market, this is disastrous, as there are a lot of borrowers
out there with upside-down loans, or in other words, they owe more on their mortgage than
what their property is worth.
Paying the minimum on your credit card will never add to the principal balance on your
credit card, but doing so will delay your ability to repay your debt in most cases up to 15
years. The average credit card has an interest rate between 12-18%, so what would this
mean for you if you had a balance of $5,000? Well, if you had a rate of 12%, it would take
you just over 10 years to repay the outstanding debt if you just made the minimum
payments. If your interest rate was 18%, that repayment schedule increases all the way up
to nearly 13 years! There are interest rates out there that exceed even 18%, so you can
only imagine what making minimum payments with these rates would do to your debt.
Even if it is just a marginal amount that you are able to set aside to pay down your credit
card, I strongly encourage you to make payments that are above the minimum. Otherwise,
you will have that debt hanging over you for quite some time. And the longer you have that
outstanding debt above your head, the more tempting a home equity loan might become,
and refinancing your house to consolidate debt is one of the worst decisions you could
make, especially given today's real estate market.
If you missed any of the tips, you can review them at left. If you have comments on this
or any tip or suggestions for a daily budget tip, email them to suggestion@myfinpro.com.
Have you downloaded the free budget yet? Our free budget spreadsheet is updated for
2008 and features a monthly account tracker and budget form!
My Financial Profile - MyFinPro.com
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